bitcoin 101
bitcoin is a form of digital money created by an unknown individual (or group) known as satoshi nakamoto.
to understand what bitcoin is, why it was invented, and the significance of its innovation, we must examine the history of money — and even time, itself.
why do we have money?
we need an effective medium of exchange.
bartering is an effective medium of exchange with 2 parties.
bartering is an ineffective medium of exchange with 3+ parties.
- bartering only really works when there is a "coincidence of wants" — when 2 parties want each other's stuff.
- bartering involves point-in-time labor.
what is money?
in short: a medium of exchange.
in theory: a market good that you acquire — not to consume, but to exchange for other goods.
a product or service that can be bought and sold in a market.
in the case of money, it's a market good that is literally traded as the medium of exchange for other market goods.
money in history
we've primarily had 2 forms of money:
- lists — of who owes what to whom
- ledgers, central banks (eg: fed reserve)
- tokens — a commodity which physically "records" who owes what to whom
- gold, silver, seashells, etc
what makes a good commodity?
- durable — it should last a long time without breaking
- homogeneous — each unit should be identical
- portable — easy to custody, transport, verify
- divisible — easy to make change
- hard — difficult to produce more units
maybe most importantly: money should maintain its value over time so that your savings are worth the same or more in the future.
gold as a token:
✅ durable
✅ homogenous
❌ portable
❌ divisible
✅ hard
lists vs tokens
- lists — efficient, but require trust
- the bookkeeper controls the information
- tokens — trustless, but doesn't scale
- though may require a tursted third party for exchange
money is information
at its core, money records who owes what to whom.
bitcoin is a ledger
bitcoin is "just" a list
bitcoin is a ledger which records who owes what to whom — "just" a list of transactions:
- with sent/received amounts
- "who" sent transactions
- when those transactions happened.
if i have a balance of 1 BTC and i send 1 BTC to Bob on Jan 1, i cannot send 1 BTC to Alice on Jan 2
blocks
bitcoin's ledger is composed of "blocks" — batches of transactions that are regularly added to the ledger.
each new block references the previous block, creating an immutable (unchangeable) sequence of transactions.
time
time is critical for transaction sequence. the past must be unchangeable and the future must be undetermined.
however, third parties cannot be trusted for time.
so, satoshi invented a new form of time for bitcoin: "block time".
time moves forward in bitcoin when blocks are added to its "chain" of blocks.
adding blocks requires work
to add a block, a computer must do work. the work it does requires energy. this energy is what ties our physical world to the digital world (imbuing bitcoins with some inherent value).
to compensate the computer for its work, the work it does is rewarded for each block it adds.
the work is computationally difficult to do, but computationally easy to validate.
the workers are referred to as "miners", and the work-based-system is called "proof of work" (PoW).
time consistency
clocks need relative consistency.
bitcoin blocks are added roughly every 10 minutes (of human time).
it's relatively arbitrary, but generally because it allows all of the bitcoin clients to distribute and agree on the order of transactions.
since computing power determines block time, time would "get faster" if more computational power was added — creating a problem for consistency of block time.
to account for this, bitcoin blocks get more difficult with additional computing power.
this difficulty adjustment prevents someone from fast forwarding time and collecting all the bitcoin block rewards.
"all the bitcoin block rewards"
there is a finite supply of bitcoin, set in the code itself. a total of 21 million bitcoins will ever exist.
the reward for adding a block lowers over time.
the first bitcoin block reward was 50 bitcoin. every 4 years of block time, the reward is cut in half. this is commonly referred to as the "halving".
- 1 block ≈ 10 minutes
- 1 hour = 6 blocks
- 1 day = 6 × 24 = 144 blocks
- 1 year ≈ 144 × 365.25 = 52,560 blocks
- 4 years ≈ 52,560 × 4 = 210,240 blocks
that means that the reward schedule looks like this:
| Reward era | Block reward (BTC) | Start block | Approximate year |
|---|---|---|---|
| 0 (initial) | 50 | 0 | 2009 |
| 1st Halving | 25 | 210,000 | 2012 |
| 2nd Halving | 12.5 | 420,000 | 2016 |
| 3rd Halving | 6.25 | 630,000 | 2020 |
| 4th Halving | 3.125 | 840,000 | 2024 |
| 5th Halving | 1.5625 | 1,050,000 | 2028 |
| 6th Halving | 0.78125 | 1,260,000 | 2032 |
bitcoin is disinflationary
bitcoin is disinflationary, meaning its rate of inflation goes down over time.
this is because of the rules by which bitcoin's reward rate operates.
this is unlike common currencies of today, such as the US dollar. because the US dollar is issued arbitrarily at the discretion of a central bank called the Federal Reserve, the supply can be inflated. because of this, the spending power of the US dollar (and other such 'fiat' currencies) trends down over time.
bitcoins are stuck in time
as the bitcoin supply is known, and because difficulty adjusts over time, one could say that bitcoins are "stuck in time" similar to how gold is stuck in the ground.
unlike gold, adding more machines (computers for bitcoin, diggers for gold) does not increase the production rate.
the only way to produce new bitcoin is to move (block) time forward, which is by doing work.
bitcoin is fair
like chess, all the rules and critical details are well-known. everyone can validate every piece of it, so no "illegal" moves can be made.
similarly, bitcoin is extremely censorship-resistant because no trusted third party is used.
in conclusion
- bitcoin's main innovation is difficulty-adjusted proof of work (and how bitcoin uses it)
- bitcoin's use of energy ties our physical world to the digital world (imbuing bitcoins with some inherent value)
- bitcoin uses the energy from PoW to secure the past
- bitcoin uses time to limit supply issuance
- bitcoin is a censorship-resistant way to digitally transfer value (which is ultimately just information)
- bitcoin is a trustless way to transfer value, involving no third parties
continued learning
bitcoin 101 is just fundamentals of bitcoin as i understand them. (in truth, i left some out for brevity)
there's a phrase that bitcoin cypherpunks like to use:
do your own research. stay skeptical.
this is also to say — be cautious. there's a lot of bad actors, misinformation, and rabbit holes you may end up in. wherever you end up, always break it down to the fundamentals.
personally: i have seen few (if any) other projects in this space that have the fundamentals that bitcoin has. i do not participate in any of those other projects. it is my personal opinion that you should exercise extreme caution if you think "this looks better than bitcoin", as i have not seen any such project yet.
this isn't to say that bitcoin isn't perfect — there are plenty of criticisms of bitcoin — it's only to say that i think it's the only project that seems to fit the fundamentals that i think matter for the mission it sets out to fulfill.
clippings
heavily inspired by jack mallers' "intro to bitcoin". it's a solid talk, but i wanted something more written and brief. (also someone talking on a stage makes the topic feel more scammy, haha)